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Builders Bottom – US-FOREX.US

Forex-Publisher — Thu, 06 Aug 2009 14:46:13 +0000

This week hasn’t been kind to the nation’s publicly traded home builders, a group that built its collective tract home at ground zero of the subprime mortgage detonation. On Monday, Pulte Homes had the unpleasant task of reporting an even worse quarterly loss than last year. Then, on Tuesday morning, D.R. Horton surprised investors with a loss twice as bad as Wall Street analysts had predicted. If everything goes according to Wall Street’s plan, Beazer Homes will post a sickening per-share loss of 1.53 on Thursday. Hey, that’s better than the 2.85 loss it reported this time last year.Then again, home building stocks have roughly doubled the return of the S&P 500 this year as home sales have picked up and the worst fears about the economy went unrealized . Since Jan. 1 the SPDR S&P Homebuilders ETF, an exchange-traded fund tracking home builder stocks, is up 25% to the S&P’s 11% gain. Even over the last trading week, with companies reporting terrific losses, the ETF is up 7.3% to the S&P’s 2.8% rise. What’s going on? For one thing, economic data is favoring the home builders. Tuesday’s report on pending home sales showed a big jump in activity. Sales were up 3.6% in June when economists were looking for a modest bump of 0.7%. Job losses appear to be slowing, consumer spending is up, if only slightly, and manufacturing and other industrial data have provided encouragement. All that could mean the economy is turning a corner and with it might come the real estate markets.But long-term worries persist and analyst David Goldberg of Swiss investment bank UBS
says investors should pay attention to details. Builders that hold lots of empty land will continue to struggle, he wrote earlier this week. On the other hand, he’s optimistic about firms that dumped their land holdings and have lower debt loads. Overall, he thinks the sector is overvalued after its run-up in recent months.One major problem dogging home builders is debt. Beazer, for example, has run up a tab equal to roughly 70% of the company’s capital. Other firms, like Hovnanian Enterprises
, also sport high levels of borrowing that will cause them to struggle in a recession. Goldberg also thinks that while demand may be rebounding thanks to swiftly falling prices and government incentives, banks are foreclosing on so many homes that the market could be swamped with supply.
For Beazer, Goldberg’s prediction is more dire than his Wall Street colleagues. He thinks the company lost 1.80 a share and predicts Beazer will lag its rivals because of its high debt load. He has a “neutral” rating on the stock. He recommends shares of Toll Brothers
and The Ryland Group
.

A Tale Of Two Balance Sheets – US-FOREX.US

Forex-Publisher — Tue, 04 Aug 2009 21:46:16 +0000

When insurance companies Prudential Financial and Allstate report earnings on Wednesday, investors will get a glimpse into the health of non-bank financial services companies. On both fronts there’s some cause for optimism, say analysts but Prudential is by far the stronger of the two.J.P. Morgan analyst Jimmy S. Bhullar believes that after issuing 1.2 billion in stock and another 1 billion in debt, Prudential has successfully shore up its balance sheet that “should enable the company to absorb investment losses, maintain its ratings and gain shares from weaker competitors in select markets.”Bhullar expects that Prudential will beat the consensus earnings estimates of 5.57 a share for 2010. He’s looking for 5.90 a share. Meanwhile, Prudential has no large amounts of debt coming due until 2011 and its management has weaned the company from dependence on the commercial paper market.The road may be rougher for Allstate
says analyst John Hall of Wells Fargo Securities. Allstate qualified for Troubled Asset Relief Protection funds but then never availed itself of the money and instead completed a 1 billion debt offering. Allstate’s investment portfolio is worth 94 billion and it has some exposure to commercial and residential real estate as well as private partnerships that need addressing.Hall says that Allstate shares are trading at 1.1 times book value. Historically, it has traded at 1.5 times. He believes that building a capital cushion is the catalyst that will eventually send the stock back to its normal multiples.Both insurers report after the closing bell Wednesday and have conference calls scheduled for Thursday morning.

The Bank Killer – US-FOREX.US

Forex-Publisher — Mon, 03 Aug 2009 20:46:19 +0000

It’s been on the lips of analysts, investors and bankers for months: commercial real estate. While the second wave of delinquencies, defaults and foreclosures could further harm the beleaguered banking industry, commercial loans are more complicated than home mortgages and some institutions will fare better than others, says Deutsche Bank analyst Richard Parkus.First, the bad news. There are more than 2 trillion in commercial mortgages coming due before the end of 2013, most of them owned by banks and insurance companies, says Parkus, who follows commercial mortgages for Deutsche. Property values are falling and credit is tight, so the prospects of refinancing are slim for many loans. Defaults are currently rising at an alarming pace.In June, one in every 25 commercial mortgages was delinquent in the U.S., more than twice the level of March. By the end of the year, that number will be one in every 14 mortgages, says Parkus, and the next two years will be particularly unkind as untraditional loans—similar to the exotic mortgages sold to home buyers—reset to higher rates or come due.The collapse will put further strain on U.S. banks already suffering write-downs on their home mortgages and other bad debts they acquired during the bull market. Collectively, the banks hold 1 trillion of basic commercial mortgages and 530 billion of construction loans. Construction loans are the riskier group, because they are backed by new developments. Many of these new developments, especially residential ones, suffer from high vacancies. That could mean one in every two construction loans goes into default, predicts Parkus. Further, vacant tract-home subdivisions have lost much of their value in the bust, so banks could lose 50% on properties they do foreclose on. All told, that could mean a loss of 25%, or 133 billion for the banks.Small banks, which hold a disproportionate amount of construction loans, will get hurt the most, says Parkus. The big national banks have less than 1% of their assets in construction loans but small, regional and local firms nearly doubled their exposure to construction loans between 2004 and this year. Among those banks, borrowers are late on 15% of construction loans right now. That will increase, says Parkus, as reserves that often accompany such loans are exhausted.

Apartment REITS To Buy And Avoid – US-FOREX.US

Forex-Publisher — Wed, 29 Jul 2009 22:46:05 +0000

As real estate companies deluge investors with earnings reports this week and next, RBC analyst Mike Salinsky says a few property owners that specialize in apartment buildings present good opportunities. But investors need to watch out for dividend cuts and stock sales as firms try to raise cash in the recession.While other property companies, especially in the office and retail sector, are seeing rents fall steeply, apartment owners are likely to report that rents are stabilizing, Salinksy wrote in a report earlier this week. One reason is that fewer people were buying homes this year and have chosen to continue renting. Also benefiting apartment companies is cheap financing, including from government-sponsored entities like Fannie Mae
.One area that presents opportunities for real estate investment trusts, or REITs, is to make acquisitions at depressed prices. So far there’s been little action, notes Salinsky, as banks and other would-be sellers stay out of the market in hopes of getting better prices down the line. If and when it comes, the buying spree will happen in the next two years.That’s not a reason to jump in with both feet, though. Salinksy warns that there are likely to be few surprises, pleasant or unpleasant, from the sector, so investors can assume prior forecasts are built into stock prices. There’s also the problem of dividend cuts and stocks sales. As credit markets have rebounded, REITs no longer find themselves faced with cash crises. But many still would like to reduce debt and build up a reserve with which to make purchases. “We recommend investors remain defensive,” says SalinksyWho might slash dividends to shareholders? Salinksy names BRE Properties
, Equity Residential
and Home Properties
. Another way to raise cash is to sell stock, something other types of REITs have been falling over each other to do this year. Apartment firms, however, haven’t yet taken advantage but may this quarter. Home Properties and UDR
are the most likely.
Salinsky recommends shares of Camden Property Trust
. Camden’s dividend is safe and its balance sheet solid enough to take advantage of buying opportunities. The firm reports after trading Thursday. Home Properties is another buy with buildings concentrated in regions facing lower unemployment. A dividend cut or stock sale could boost investor confidence in the company. Salinksy’s other recommendation is Mid-America Apartment Communities
, although the current price means investor shouldn’t risk too much on this stock. Home Properties and Mid-America announce results August 6.Investors might want to sell BRE Properties and Apartment Investment & Management Company
, notes Salinksy. BRE owns buildings in areas of high unemployment and could fall short of earnings expectations when it reports August 4. Aimco, which reports earnings on Friday, needs to sell buildings to pay its debts but may not have been able to unload them at attractive prices. Investors would do better elsewhere, says Salinksy.

Home Builders Headed For Hardship – US-FOREX.US

Forex-Publisher — Thu, 23 Jul 2009 20:46:05 +0000

The housing market is back, or haven’t you heard? On Thursday, the National Association of Realtors said existing home sales climbed for the third month in a row. The increase spanned the nation and came with a smaller percentage of foreclosures on the market. There are many ways to read housing data-volume, prices, number of unsold homes on the market-but there’s little doubt that government incentives combined with price declines of 50% in some states are getting people out to browse. Signs of life in the housing market inevitably draw investors’ attention to the stocks of national homebuilders whose McMansion assembly lines and we’ll-finance-anything-with-a-pulse attitude contributed mightily to the housing bubble and bust. Sure enough, Thursday’s existing home sales report pushed the SPDR S&P Home builders ETF up 5.7% by the afternoon. But although they appeared to dodge the market collapse with sharper timing than the banks that lent to them, home builders carry some big pitfalls for investors, write David Goldberg and Susan Maklari, analysts at investment bank UBS
.Most of the big home builder firms report earnings in the next two weeks, starting with Standard Pacific Corp.
Thursday. While they are likely to show that demand kept up through the second quarter, Goldberg and Maklari are skeptical about the second half of the year. For one, prices continue to fall and they think home values have another 5% to 10% before the market bottoms later this year. For home buyers, some major incentives are lapsing. A 10,000 tax credit offered by California on new homes has been exhausted. The federal government’s 8,000 credit for first-time buyers ends in December. Mortgage rates, which had fallen sharply along with borrowing rates for banks, have begun to rise again, which usually slows the pace of home sales.Another stumbling block is that banks are just now starting to flood the market with foreclosed homes they’ve been hoarding, driving supply up and prices down. The two analysts also guess that the pace of foreclosures is accelerating now that federal and state moratoriums have expired.
That makes the economics of buying land and building hundreds of homes difficult to justify. “In a number of housing markets today, builders can’t purchase raw dirt, entitle, develop and build a home on it and generate positive free cash flow,” say the analysts.Debt is another looming problem for several firms. In particular, Hovnanian Enterprises
and Beazer Homes USA
have high levels of debt. Hovnanian sports a debt-to-capital ratio of around 60% while Beazer ran up a 70% ratio, notes Goldberg and Maklari. They think home builder stocks, as a group, could lose 15% to 20% in the next few months.They do, however, recommend two companies. High-end builder Toll Brothers
, which has the lowest debt-to-capital ratio of all the national firms, and the Ryland Group
, with the second-lowest debt level. Both firms have been losing money on an operating basis for the last four quarters.

125 Mortgage No Reason To Panic – US-FOREX.US

Forex-Publisher — Thu, 09 Jul 2009 11:46:21 +0000

Will anything ever change in Britain as a result of the financial crisis? Not only has Finance Minister Alistair Darling shied away from a radical overhaul of financial regulation with his latest proposals, but on Thursday cooperative bank Nationwide also seemed to hark back to the old ways with a mortgage product offering 125% of a property’s value. Might this be evidence of another bubble on the horizon?Not quite. Nationwide’s 125% product, which has only been on the market for a month or so, is at heart a 95% loan-to-value mortgage with an extra buffer zone for homeowners trapped in “negative equity”-or when a house is worth less than its mortgaged value. Nationwide allows consumers to transfer some of this negative equity to their new property, up to a limit of 125%, when they are looking to move home. It’s a specific service for a “very small number of customers,” according to Nationwide.By comparison, market leader Lloyds Banking Group
offers 95% mortgages under the Lloyds brand and 90% mortgages under the Halifax banner, with various measures to attract first-time buyers. Consumers trapped in negative equity are dealt with on a case-by-case basis. As for Northern Rock, which in the golden years of the mid-2000s did offer 125% mortgages, it now has a slightly more restrained loan-to-value ceiling of 85%.This does not remove the risk that, as the British property market stabilizes, lenders will start to compete more aggressively for borrowers and offer much better-perhaps irresponsible-terms. “Right now, I can’t see any sort of problem, but it will happen again in the future when the market begins to rise,” said Liam Bailey, head of residential research for real-estate agent Knight Frank. “Lending becomes more lax, it becomes easier to access debt.” A market turnaround may not be far off. Research from Lloyds tracked a 0.5% decline in average house prices between May and June of this year, which would suggest the worst has passed, while policymakers in Britain are keen to drive lending and stimulate the mortgage market to spur the economy.But for the time being, obtaining a big mortgage is not easy or cheap. Even though interest rates in Britain have been slashed to 0.5%, with the Bank of England also embarking on a money-printing program to stimulate the economy further, borrowers can still expect to pay around 6 or 7 percentage points above the base rate for a fixed-rate, high loan-to-value mortgage.
“There’s no doubt that you can get hold of high loan-to-value mortgages but you get penalized on the rate you pay,” said Bailey. “The reality is the mortgage companies are quite happy to lend people lots of equity.” He said that there were fewer competitive pressures in the mortgage market, with many lenders having closed their doors or joined forces, contributing to a shrinking of the mortgage pool.According to Selwyn Lim, director of property research firm Mouseprice, lenders’ lax vetting procedures during the boom times were also to blame. He said that some buyers had managed to get even higher loan-to-value rates than offered by the banks. As an example, Lim said that developers had even offered cash payments to buyers upon completion, an attractive top-up when combined with the mortgage itself. “I would like to think that lenders would have wised up,” said Lim.

Whitneys New Take On Modified Loans – US-FOREX.US

Forex-Publisher — Mon, 06 Jul 2009 20:46:10 +0000

Star analyst Meredith Whitney expects the number of mortgage modifications to become exponentially higher, which is good news for the banking sector. But she hasn’t always felt this way.Over the past two years, Whitney, who recently opened the Meredith Whitney Advisory Group, has been relatively dismissive of the idea, “primarily due to the fact that few were taking place as the servicer historically bore substantial liability risk to alter the terms of a contract, and a large number of the modified loans ultimately re-defaulted anyway.”However, in late-May, through the Helping Families Save Their Homes Act of 2009, Whitney pointed out that services are now free of any legal liability from altering a mortgage contract. Meanwhile, the Treasury Department has allocated 18 billion to encourage services to modify loans.”We believe we are on the onset of changes impacting the mortgage market that could meaningfully influence earnings of the banks over the near to medium term,” Whitney argued in a recent report. She said that accelerations in loan modifications will materially change how loss reserves are measured, which will result in lower loss provisioning and higher earnings over the near term. The newfound flexibility is great news for the industry, which faces continued declines in home prices and rising unemployment.As Whitney noted, the U.S. government increased allocated incentives to mortgage companies by a fifth to modify home mortgages, while total incentives to servicers now stand at 18 billion and could climb higher.
“This is not the only incentive to banks,” Whitney said. Modifications “cure” past dues and shift delinquent loans to current loans. As banks’ loss provisions are based upon past due or delinquent loans, Whitney reasons that loss provisions will decline as modifications rise.”The clear risk here is timing as current recidivism rates range 22-46% on modified loans. Banks may take advantage of a timing arbitrage, which could benefit near-term earnings,” Whitney said.Earlier this year, Whitney projected financial losses though 2010, arguing firms including American Express
, HSBC
, Morgan Stanley
and Goldman Sachs
failed to reserve against real estate and mortgage losses. Beyond the impact of the loans, Whitney expects the second quarter will result in continued growth in tangible capital. As such, Whitney raised her estimates on the banking sector, increasing her tangible book values for most of the banks she follows.”As we continue to believe the bank sector faces numerous challenges, we are most comfortable with stock valuations close to tangible book per share levels,” Whitney said. Pointing to Bank of America
, JPMorgan Chase
, Wells Fargo
and Citigroup
, she expects future increases in tangible book value, except for Citigroup.

Phantom Homes – US-FOREX.US

Forex-Publisher — Thu, 02 Jul 2009 21:45:59 +0000

There is a “phantom inventory” in the United States housing industry, hidden from the eyes of analysts and investors, and distorting the market’s landscape.Steven Hagenbuckle, managing principal at TerraCap Partners, a distressed real estate private equity fund, expects to see the beginning of the release of the phantom inventory in the next 90 to 180 days, though the inventory influx will come in different waves throughout the country. The hidden inventory is composed of REOs, or “real estate owned”, properties. Hagenbuckle found that between May 2008 and May 2009, there were a total of 3,734,711 foreclosure filings, and of those total filings, 26.4%, or 985,571, were REOs, These homes are otherwise hidden from view, while the rest are listed to the public through the multiple listing service, or “MLS”, system.In the case of REOs, banks will takeover foreclosed properties, sell the blocks to interim investors who then sell it to the homeowner. For example, a bank will take 50 bad residential properties, and bundle them together at a discount from anywhere between 40 to 60 cents on the dollar, and put them out for bid as a package. Ostensibly, a large number of sales could occur, but the market wouldn’t know about it because it’s hidden from the view of normal public channels.Depending on the number of properties in a particular location, Hagenbuckle said, banks may find it easier to sell a block or bundle of homes directly to a private investor when demand for those bundles occur. On the other hand, it may be easier to manage scattered properties in varied locations with the help of multiple real estate agents who list the properties on the MLS independently.According to Hagenbuckle, there is a lag time of three to six months between when the block is purchased by the interim investor, and when the homes reenters the market-presumably at an increased price-for resale.
The reason Hagenbuckle expects a sharp infusion into the market is because the situation has become distorted by a patchwork of government and private mandates to freeze the foreclosure process. For example, Fannie Mae
and Freddie Mac
‘s mandate was officially lifted on March 31, Florida governer Charlie Crist enacted a hiatus that lasted until mid-January, while California issued another 90-day moratorium took affect on June 15. Some of the nation’s largest financial institutions have also issued moratoriums, including Citigroup
, Bank of America
, Wells Fargo
, Morgan Stanley
and JPMorgan Chase
.

Feeding Off Freddie – US-FOREX.US

Forex-Publisher — Mon, 29 Jun 2009 21:46:12 +0000

For shareholders of government-backed mortgage companies Fannie Mae and Freddie Mac, the last year has been most unkind. After Congress bullied the firms into making risky loans, regulators seized them last fall as defaults spiraled out of control, threatening the safety of trillions of dollars in mortgage bonds. Shareholders lost more than 97% of their investments. If the government comes along tomorrow and says ‘We’re gonna let everyone refinance at 2%,’ then their entire portfolio evaporates,” says Widner about agency REITs.

Real Estate Wont Recover Until 2017 – US-FOREX.US

Forex-Publisher — Wed, 24 Jun 2009 19:10:30 +0000

There’s another bomb hidden in the real estate market, but unlike subprime mortgages, this one will take a decade to explode. Commercial properties-offices, hotels, malls-could suffer a wave of foreclosures like the one that hit the residential market last year, says Deutsche Bank analyst Richard Parkus. As tenants struggle to make rent, delinquencies are up, bringing down rents and values and hurting the already struggling secondhand market for mortgages that cover these properties. Since many banks, insurers and investment funds hold those mortgage-backed bonds, they could be looking at steep losses in the next few years. This could signal new and unexpected writedowns for banks with commercial mortgage backers, including large players like Bank of America
and Citigroup
as well as regional banks like Regions Financial
, SunTrust Banks
and Fifth Third Bancorp
.Since 2007, says Parkus, commercial real estate values have dropped more than 40% nationwide, with some sectors especially troubled. Rating agency Moody’s, which uses different methods to calculate property values, says commercial real estate declined nationwide by 8.6% in April to levels last seen at the end of 2004.
While home foreclosures show some signs of leveling off, commercial delinquencies are rising between 0.3% and 0.5% a month, according to Deutsche Bank. The cause: businesses struggling with lower consumer spending and high unemployment. When the financial crisis hit, some observers thought the long-term nature of many commercial leases would insulate the sector. Instead, tenants are demanding that landlords lower the rent. Landlords, daunted by the prospect of finding new tenants in the midst of the downturn, have little choice but to agree, says Parkus.That is bringing down rents in many markets and, with them, property values. With few buildings changing hands, valuation has become something of a guessing game, he adds, but some areas have lost more than 50% of their value and the pace of decline is picking up.”We’re in the period of maximum deterioration,” Parkus says.
Anyone looking for a quick rebound in property prices and defaults is going to be disappointed. Issuance of commercial mortgage bonds peaked in 2007. Most CMBs are 10-year fixed-rate loans that mature in 2017, when a huge amount of debt comes due. Until then, though, landlords are facing a tough environment in which rents are slipping but opportunities to refinance are few. As a result, delinquencies, now just under 3%, will likely rise to 5% by the end of the year and could grow to as much as 9%.Parkus says property values won’t turn around until 2012 and won’t return to their 2007 peaks until at least 2017. The reason is that commercial property tends to follow unemployment and the Federal Reserve said it expects unemployment numbers to turn around in three years, says Parkus. After that, the market should see gains. But there could be huge losses for investors and banks before that.Nearly 40% of mortgaged properties are worth less than the mortgage, says Parkus. In a 3.5 trillion market, that could mean giant writedowns at investment funds, insurers, banks and others holding the paper. Commercial mortgage-backed securities already trade at large discounts to reflect that. Parkus suspects many banks hold big slugs of commercial mortgages they are reluctant to dump on the market-and the more local the bank, the bigger the risk to its financial health.
Several changes might come to the commercial property sector’s rescue. The government doesn’t want banks to fail and could step in to boost refinancing or take the shaky loans off institutions’ books. Then there are real estate investment trusts-public companies that own and manage commercial properties. From their peaks during the real estate boom to their lows after the financial crisis, REIT stocks lost 75% of their value. They’ve come back strongly, though, as many REITs have raised money with share offerings and now may be poised to acquire properties for half of what they would have paid in 2007. Any surge in buying could bring with it higher prices. Lastly, says Parkus, the dire need to refinance many loans means opportunity for investors willing to lend. If none of these come through, it could be a long, slow recovery.